Succession planning far from child's play

Tabloid dramas serve as a reminder that squabbles can wreak havoc with a family business if the handover to the next generation is badly managed

Cliff Sun Kai-lit has seen a lot of family companies fail. He wants to make sure his survives.

Mindful of the adage about family wealth being squandered by the third generation, he encouraged his sons to first experience the rough and tumble of the business world outside the familiar comforts of their family firm.

Suitably worldly, his two eldest sons have now joined their father producing and marketing the household appliances their firm Kinox is famous for.

How to prepare the next generation to lead the family firm is one of the most pressing challenges facing Hong Kong businesses. As the post-war crop of corporate patriarchs start dying off, executing a successful transition is a delicate process fraught with risk as families negotiate over control and equity distribution without succumbing to internecine squabbles.

While data on local family-owned firms is incomplete, the "Asian Family Businesses Report" by Credit Suisse says that in 2010 family businesses made up 62 per cent of Hong Kong-listed companies with a market capitalisation of more than US$50 million. The report defines a company as family-run if an individual or family holds at least 20 per cent of cash-flow rights.

Anecdotally speaking, the burden of inheritance weighs heavily on local family firms.

"In Chinese culture, they always like to run firms in the family. If you look at Western family firms, they often have a strong tendency to corporatise the firm and issue a shareholding system from the very beginning," says Nicholas Ho Lik-chi, a second-generation manager at Ho & Partners Architects.

Patrick Hamlin, a lawyer at Withers and adviser in intra-family litigation disputes, says: "The traditional Hong Kong approach is that the old man hangs on to it all and really doesn't make any great plans for it.

"The children tend not to challenge when the father is in charge. Tensions are suppressed until after the death and then all hell can break out in an emotionally charged situation.

"The sense of competition and wanting to get your share overtakes commonsense."

Any transition is often complicated by what Hamlin delicately calls "less structured relationships" - read mistresses and illegitimate children, for instance.

The dysfunctional nature of family breakdowns makes for classic tabloid fodder - witness the public carping of casino king Stanley Ho Hung-sun's extended family, or the courtroom dramas of Henry Fok Ying-tung's descendants seven years after he died - but they have real-world implications in failed firms and job losses.

The challenge is illustrated most starkly by one former senior executive for a well-known billion-dollar manufacturing conglomerate who quit once it became clear that the current crop of owners had suddenly dropped well-developed plans for a trade sale and were instead passing the company over to their respective sons.

"The problem was that they turned the company over to an inexperienced and unqualified next generation, leading to the loss of senior managers including all their factory general managers," the former executive says.

Describing the prospective managers as "totally out of their depth", he says they had never worked outside the firm, and in several cases were expelled from their schools and universities.

The former executive says that in the two years since the succession plan was announced revenues had halved and more than 75 per cent of staff had left.

The executive requested anonymity given the sensitivities of the situation.

To help avoid such calamities, families are advised to plan early, identify and nurture future talent from within the next generation, and ensure that other family members, while financially compensated, have limited decision-making input. The use of family trusts, charters, wills and memorandum of association are all tools that should be considered, Hamlin says.

The patriarch also needs to be prepared to relinquish control and allow his children and senior managers the autonomy to establish themselves.

"The incoming generation says there is no delegation of power from parents and no career structure for them. You need a trigger event [to create a succession plan]; but because of fear or worry, or over-self-confidence, [patriarchs] tend to delay it," says Kevin Au Yuk-fai, a professor at Chinese University of Hong Kong business school and part-time adviser on succession issues.

Other tools include the use of outside mediators who can advise families on appropriate structures and assist in putting professional managers in place to compensate for personnel shortcomings.

While commonsensical to outside observers, such steps are considered quite difficult to take in some families as it can be misinterpreted as a power grab. "It can be really difficult for the second generation to talk about these sorts of things. It disrupts the harmony in the family," Au says.

[1]Nicholas Ho

The top job is not an automatic shoo-in for Nicholas Ho Lik-chi despite being the only son of Bosco Ho Hin-ngai, the founder of renowned architectural firm Ho & Partners Architects (HPA).

With more than 240 staff and a network of regional offices, HPA has given Ho Junior milestones to pass if he wants to make it to the boardroom finish line.

Splitting his time between marketing and design, Ho expects to be sent to help manage the Shanghai office, with a specific mandate to grow revenues and staff and at the same time study for his architectural licences and a possible doctorate.

Under constant review from the board, he has to compete and excel against his contemporaries. "I have to prove myself and earn my way in," says the 27-year-old.

A graduate of the Architectural Association School of Architecture in London and former staffer for architectural guru Zaha Hadid, Ho has always felt the pull of the family firm. From an early age he visited construction sites and helped his father build models, though if Ho had not joined the firm, he doubts his father would have minded. "The decision was mine. I tried different things and settled on this," he says.

The use of targets to test the next generation is not uncommon. What is less so is a structure HPA designed to support Ho - or find a substitute for him should he change his mind.

"People assume I will take over one day but the plan my father and I agreed on is that we would see way beyond a family business."

Aiming to build a durable structure that could outlast the original founding family, HPA consulted with outside advisers and created a shareholding model that let Bosco Ho retain a controlling stake while allowing 14 other senior executives to buy minority positions. Should Ho's son have a change of heart, the family can either cash out, or reduce their holding and let existing shareholders take control of the firm.

Ho sees this structure as a solution to the often unrealistic expectation that a founder's children are naturally suited to running a major firm.

"In most family businesses there is no going back. Once you are in, you are in for good. You can't abandon your family," says Nicholas Ho.

Referencing his friends, who he meets regularly to discuss these issues, he says some of them are stuck in frustrating family disputes over how to manage their respective firms.

Cliff Sun

A child of a bygone era, Cliff Sun Kai-lit grew up on his father's Kwun Tong factory floor. His playground was the assembly lines and power presses that busily made home appliances for foreign brands.

One of five children, he went to Canada for university before returning in 1978 to join the family firm, Kin Hip Metal & Plastic Factory. Within a year he had launched an own brand, Kinox, that last year sold HK$200 million worth of kettles, saucepans, and assorted appliances globally.

Between him and his two brothers, Sun controls 60 per cent of the company. His two sisters were bought out in 1994 by swapping shares for family real estate. His parents, now retired in Australia, own the outstanding 40 per cent.

It is an arrangement that satisfies all parties, says Sun, adding that a satisfied family has been the foundation to a successful company. The only brother to have children, Sun's three sons are the presumed heirs.

Now aged 60, with a portly build and an infectious laugh, Sun says he is confident his sons will take over from him and treasure the brand. There is no plan B.

The former chairman of the Federation of Hong Kong Industries, he eschews the idea of achievement targets for his children, instead preferring a hands-off approach.

"My guidance is as an adviser. If I try to control, I might discourage them," he says.

Instead, he sees the company as a platform for his children to nurture and develop. He has, though, encouraged - even forced - his children to first work outside Kinox under "proper pressure from outside bosses".

He hopes the experience means they "are not as arrogant as some third generations with their Ferraris. They see the hardworking young people trying to build the family business."

Equally important, his sons have picked up a broader skill-set in marketing and communications, which should translate well when selling branded appliances. Being able to call on colleagues for support is one lesson Sun wants to impress on his children.

"I agree I put hope in the next generation. But at the same time … I have looked around and seen that the next generation is not always qualified. It is therefore important to use professionals. You are the team leader but your views are not necessarily the best."